Multiemployer Pension Plans in Mergers and Acquisitions

C&G Review
Spring 2006

As ERISA benefits counsel, we frequently are asked to review the applicable benefit plans of a selling organization for compliance with applicable law. In most sales of companies, the parties can work out benefits issues. However, one significant exception involves potential withdrawal liability under a multiemployer pension plan.

A multiemployer pension plan is a collectively bargained pension plan, generally organized by industry or region, established by trustees from both labor and management. Through collective bargaining, the company negotiates both to participate in the multiemployer plan and to contribute based upon a certain unit value. Unfortunately, the unit value of contribution may not necessarily correlate to the funding experience of the multiemployer plan. Multiemployer pension plans benefited greatly from stock market increases in the 1990s. To maintain the tax deductibility of contributions for the participating companies, benefits were increased so that the plans were not fully funded at about the time that the market diminished in value in the early 2000s. Thus, commonly, multiemployer pension plans now are significantly underfunded.

In the event of a complete withdrawal from a multiemployer plan, a withdrawal liability can be assessed against the participating company. A complete withdrawal from a plan occurs when the employer permanently stops contributing to the plan whether because of a sale of the company or a cessation of union activities. The plan's actuaries do not calculate a company's withdrawal liability until financial and census data is accumulated at the end of the plan year. Therefore, a period of 18 to 24 months may pass after the date of a withdrawal before the trustees of the multiemployer plan issue a formal notice to the company of the amount of its withdrawal liability. As a result, sellers frequently are shocked to receive a withdrawal liability notice after the company has been sold and possibly even liquidated.

Generally, a sale does not trigger withdrawal liability if the buyer assumes the obligations of the seller and no interruption occurs in making contributions. However, buyers will not step into the seller's shoes without a comprehensive understanding of the risk of potential withdrawal liability. An asset sale normally is coupled with a complete cessation of contributions and, therefore, a withdrawal liability for the seller. The seller can avoid this result if certain conditions established under ERISA are satisfied: the sale is a bona fide, arm’s length sale to an unrelated party; the buyer assumes an obligation to contribute to the plan on the same basis for which the seller had an obligation to contribute; and the buyer posts a bond or escrows an amount equal to one year of the seller’s contributions. Additionally, the contract of sale must provide that the seller is secondarily liable if the buyer withdraws within the next five plan years. Obviously, buyers will not readily enter into such an agreement without adequate due diligence respecting potential withdrawal liability.

The amount of potential withdrawal liability is purely speculative without accurate data as to the company's contribution levels and adequate plan financial information to make an actuarial determination. Any company participating in a multiemployer plan must exercise due diligence to determine its potential liability each year in the regular course of business either by requesting from the plan's actuaries a calculation of its potential withdrawal liability or by requesting the trust’s financial statements for use by the company’s actuary to make that determination. This routine practice will avoid the necessity of requesting a withdrawal calculation at the time of a sale, when the parties least desire to alert the trustees to the potential transaction. Therefore, whether a sale is anticipated today or in the future, potential sellers must begin now to build a historical record of the contingent obligations to multiemployer plans. Without this information, buyers will be extremely reluctant to proceed with the transaction.

For more information, please contact bgabler@cohenlaw.com or nheilman@cohenlaw.com