Pension Plan Update: Employers Benefit from
Recent Changes to Withdrawal Liability Statute
The federal Pension Protection Act of 2006 (PPA) contains new provisions regarding withdrawal liability that provide additional benefits to employers.
Employers that participate in multiemployer pension plans should know that they may incur liability to the plan if they terminate (or, in certain cases, reduce) their participation at a time when the plan’s assets are insufficient to pay for promised benefits. Known as “withdrawal liability,” this obligation is imposed on the employer, which is defined to include not only the business contributing to the plan on behalf of its employees, but also other businesses that are under common control (often referred to as a “control group”). IRS regulations generally provide, for example, that a parent of a corporation that contributes to such a plan will be part of the control group if it owns 80% or more of the voting stock of a contributing entity. Liability is assessed on all businesses in the control group on the date of the withdrawal.
The withdrawal liability statute contains a number of defenses, or safe harbors. For example, if the parent company sells its stock in the contributing corporation before participation terminates, it will not be jointly liable for the withdrawal liability of its former subsidiary. The statute qualifies the availability of this defense, however: if a principal purpose of the stock sale is to evade the withdrawal liability, then the transaction is disregarded. This means the former parent will be considered a part of the control group if a withdrawal occurs later, and will remain jointly responsible for the former subsidiary’s withdrawal liability.
The Evolution of Withdrawal Liability
Amendments to the withdrawal liability rules incorporated in the 2006 PPA provide some relief from the procedures originally applicable to stock sale transactions. When the withdrawal liability statute was enacted in 1980, it called for withdrawal liability disputes to be resolved in arbitration. The plan was required to determine the amount it believed the employer owed as a result of its withdrawal from the plan, and to send a notice to one of the businesses in the control group, along with a schedule for payment of the liability in installments. Any member of the control group that wished to dispute its liability then had to initiate the arbitration process within a limited time period or waive its defenses to liability.
Even if arbitration was initiated in a timely fashion, however, the rules generally favored the plan. First, the plan’s determinations about liability were presumed correct in the arbitration, meaning the employer had the burden of proving the plan wrong in order to prevail. Second, despite having filed a dispute about its liability through the arbitration process, the employer was required to make payments according to the installment schedule provided by the plan (to be refunded, with interest, in the event it prevailed in arbitration). Courts coined the phrase “pay now, dispute later” to characterize this statutory scheme.
Some limited relief was provided to employers in 2003, when the statute was amended for a particular category of older transactions, including certain stock sales. If a stock sale transaction occurred five years or more before the withdrawal of the former subsidiary (and the plan determined that the transaction was completed in order to evade liability), then the presumption in favor of the plan in arbitration was voided, and the plan had the burden of proving that the transaction was intended to evade withdrawal liability. Relief was also provided regarding the “pay now, dispute later” rule. As a result, the employer was not required to make payments until the plan’s determination regarding withdrawal liability was upheld by a final decision after arbitration. (Note: The 2003 payment and presumption rules applied to employers that received notice of withdrawal liability after October 31, 2003, although the relief only covered transactions that had occurred before January 1, 1999.)
Additional Relief for Employers Is Here
The 2006 PPA provides additional relief, particularly for small employers. The new act modified the special payment rule for cases where the transaction occurred five years or more before the withdrawal, and made it available to transactions that occurred on or after January 1, 1999. For large employers, the new amendment replaces the “no payments until final decision” rule of 2003 with a rule stating that nothing is payable for the first year after the employer elects the special payment rule. Thereafter, a bond must be posted once a year covering the payments that would otherwise be due for the next year. Small employers (defined as companies with fewer than 500 employees) can also elect the new special payment rule for any such transaction that occurs two years or more before the withdrawal.
The new special payment rule applies to entities of any size, where the notification is received on or after the date of the PPA's enactment (August 17, 2006) and the plan has determined that the entity is liable solely because of a (post-1998) transaction to evade or avoid liability.
Practical Tips
Generally, an employer can only take advantage of the special rules if it files a timely demand for arbitration. Thus, an employer that receives or otherwise learns of a notice of withdrawal liability should contact counsel immediately in order to initiate the arbitration process prior to the deadline. Indeed, corporations that are (or have at any time been) in a control group with an employer in a multiemployer pension plan may wish to implement procedures to ensure that they respond in a timely fashion to such a notice.
Additionally, some courts have suggested that, at the time of a spin-off of a subsidiary contributing to such a plan, parent companies should consider bargaining for contract provisions to protect themselves in the event of a post-spin-off withdrawal of the former subsidiary. Such provisions, for example, might require the subsidiary to advise the former parent if the subsidiary receives a notice of withdrawal liability after the sale.
|
