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The Problem with Multi-Employer Pension Plans

For unionized employers that are signatory to area-wide or industry-wide collective bargaining agreements, the multi-employer defined benefit pension plan for many years has provided employees who are covered by these agreements with a definite level of pension benefits on retirement based upon the contributions made by the participating employers as well as the employee’s length of service in the plan. Although not as prevalent as they once were, these plans still exist in many industries, most notably in construction, transportation, and some areas of manufacturing (e.g., the auto industry). Of course, these types of pension plans are the norm in the public sector, where the legal rules governing them are much different and the levels of funding much less secure than they once were.

Recently, and apart from the reduction of the percentage of unionized employees in the private sector workforce over the past 50 years, these plans have fallen out of favor with employers for a variety of reasons, and fewer unionized employees are covered by them than in prior years. There are several reasons for this trend.

Cost of the Plans 

Defined benefit plans typically provide for a specific (“defined”) benefit to an employee of a certain amount of pay per month multiplied by the years of service that the employee has in the plan. As salaries have increased, so too have the cost of the benefits paid to employees under these plans. Thanks to the requirements of ERISA, after a certain period of years these benefits are “vested” and normally cannot be reduced by the plan administrators should the plan suffer investment losses or a major reduction in participation. Hence, the amount of contributions that must be made by participating employers to these plans has increased significantly, not just to underwrite higher pension benefits, but also to account for poor investment experience or the declining number of active employees on whose behalf these contributions are made. Further, these plans have high overhead costs resulting from the need for a paid administrative staff, independent investment advisors, legal counsel, and accounting and actuarial services. All of these factors have greatly driven up the cost of these plans over the years.

Lack of Control over the Plan 

In a large multi-employer plan, sometimes hundreds or even thousands of companies contribute money on behalf of the hours worked by their union employees. However, under ERISA and the Taft-Hartley Act, these plans are run by trustees, half of whom are appointed by the union and half by the employer associations that typically negotiate the collective bargaining agreements that sponsor these plans. The average participating employer knows virtually nothing about the workings of these plans and has nothing to say about how they are run or where the plan assets are invested. Instead, the employer is represented by a management-appointed trustee whom it did not choose and whom it cannot remove if the employer believes the trustee is not properly representing the interests of the participating employers.  

Pension Withdrawal Liability 

Under the 1980 Multi-Employer Pension Plan Amendments to ERISA, if a defined benefit plan has “unfunded vested benefits” (“UVBs”), an employer who decides to withdraw from the plan will be required to pay “withdrawal liability” to the pension fund as the price for leaving the plan. Although this liability changes depending upon the financial health of the plan, in recent years, owing to the stock market crash of 2008-2009, most multi-employer plans now have significant withdrawal liability requirements. Depending upon the amount of pension contributions paid by the withdrawing employer over the years, as well as the amount of the UVBs, such employers can be assessed hundreds of thousands or even millions of dollars in such liability. And to make matters worse, if too many employers withdraw from the plan at the same time, a “mass withdrawal” can occur, under which the employers will be required to bear an even greater share of the withdrawal liability that relates to already departed employers from which such sums could not be collected (either due to liquidation or bankruptcy). In addition, the employer has virtually no defense to withdrawal liability claims, and even if a defense can be established, the matter can be litigated only in an arbitration proceeding wherein the employer is essentially “guilty until proven innocent.” During the pendency of that arbitration, the employer must make quarterly withdrawal liability payments to the pension fund or risk a finding of “default,” which allows a court to accelerate the entire amount of the unpaid liability. Finally, to add insult to injury, in certain cases, the pension fund can collect withdrawal liability from the company’s shareholders personally or from commonly held businesses owned by the same shareholders.

Pension Protection Act Requirements 

For many years, commentators argued that Congress needed to address the chronic underfunding of multi-employer defined benefit plans and to require these funds to put their fiscal house in order, so to speak. In a classic case of “be careful what you wish for,” in 2006 Congress passed the Pension Protection Act, which required multi-employer plans to take concrete steps to bolster their financial conditions if the plans were funded at less than 80% (i.e., “yellow” plans), or less than 65% (“red” plans). Plans in poor fiscal health must adopt funding-improvement or rehabilitation plans that increase contributions and/or reduce some benefits and those plans must be ratified by the unions and employers. In the event that such measures are not agreed upon, the participating employers run the risk of IRS excise tax assessments and other penalties that increase over time until an improvement plan is adopted. The result of these requirements is that frequently the participating employers wind up paying significantly higher pension contributions to underwrite what is often a lesser overall benefit package, in order to move the plan from “red” to “yellow” or from “yellow” to “green” (i.e., sufficiently financially healthy) status. To lessen the impact of the Pension Protection Act on multi-employer plans, in 2010 Congress amended the statute to allow the plans to “smooth” their losses from 2008 over a much longer period of 20 years, thereby making it a little easier for the plan trustees to adopt funding-improvement measures that were slightly less draconian in nature in terms of benefit cuts and contribution increases.

From this discussion, it can be easily understood why employers who have such multi-employer plans in their collective bargaining agreements wish to eliminate them, and why new employers are reluctant to sign union contracts that contain such plans. While defined contribution plans have their own sets of problems, they pale in comparison to the issues presented by multi-employer defined benefit plans. 

This article was contributed to Blackman Kallick’s Manufacturing Edge by Michael W. Duffee, Partner at Ford & Harrison, LLP. For more information contact Mike at mduffee@fordharrison.com or 312-960-6106; Kevin Loudon, Senior Manager, Blackman Kallick Audit Services Group at kloudon@BlackmanKallick.com or 312-980-3358; or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.