Posted by Maria T. Hurd, CPA
Plan sponsors who are signatories to collective bargaining agreements agree to make contributions to their employees’ unions’ benefit funds, which generally include a welfare plan, a defined benefit pension plan, and a defined contribution annuity fund, among others. In the case of defined benefit pension plans, an employer’s contributions are not specifically earmarked only for their employees. Like all defined benefit pension plans, the plan assets fund the benefits for all eligible plan participants, including those who work for other employers who are also signatories to the collective bargaining agreement. Each year, an actuary computes the funded status of the plan by calculating whether the plan assets are expected to be sufficient to pay for promised future benefits. The funded status is often described with colors as follows:
- Green zone: at least 80% funded
- Yellow zone: between 65% and 80% funded
- Red zone: less than 65% funded
Based on the plan’s current and projected funding levels, and taking into account the projected hours of work, the actuary computes the needed funding, and helps the plan trustees determine their options when negotiating the plan’s hourly contribution rate. The signatory employers understand why they contribute to the benefit funds for each hour of work that their employees work. What they don’t always fully understand is that if they partially or fully terminate their association with a bargaining unit and they are no longer required to contribute to the multiemployer plan, and the plan is underfunded, the employer may be required to pay a withdrawal liability to the plan.
The amount of the withdrawal liability assessed against a company depends on its share of the unfunded, vested benefit and the company’s past participation in the plan. The plan actuary performs the calculation, which is subject to plan specific rules and legislative regulation. Because the actuary is required to use PBGC mandated interest rates and actuarial assumptions when computing withdrawal liability, the withdrawal liabililty can far exceed the employer’s share of the underfunding determined using the plan’s interest rate and actuarial assumptions.
Furthermore, there are exemptions to the withdrawal liability rules for certain types of plans and employers. For example, if the plan is considered a construction industry plan and the employer is a construction industry employer, such employer will not be considered to have withdrawn from the plan unless the employer stays in operation but continues (or within five years resumes) the same type of work in the same jurisdiction covered by the collective bargaining agreement. In other words, a construction contractor that decides to retire and close up shop is not subject to a funding requirement due to withdrawal liability. If an employer sells its assets, it will not have withdrawn if the purchaser of the assets continues to have an obligation to contribute for the work related to the assets in substantially the same amount as the seller. The seller will remain liable for its withdrawal liability if the purchaser later withdraws from the multiemployer pension plan.
A partial withdrawal can occur when employer’s contribution base, the work performed in covered employment has decreased by at least 70 percent, and stayed at that depressed level for an extended period, measured by comparing the last three consecutive years with the two highest years within the five years before that three-year period. This means that to identify a partial withdrawal, the actuary studies fluctuations in employers’ contributions for an 8-year period. The liability for partial withdrawal is a prorated part of the liability for complete withdrawal. For the construction industry, there is no partial withdrawal, unless the employer maintains an “insubstantial” portion of its total work in the jurisdiction covered by the plan. For example, if a contractor goes non-union for most of its work in the jurisdiction, but keeps one or more members of the local that require plan contributions, the contractor would owe contributions for the partial withdrawal. The liability for partial withdrawal is a prorated part of the liability for complete withdrawal.
Plan Sponsor Disclosures
The employer’s potential withdrawal liability is not a required disclosure in the employer’s financial statements. Instead, plan sponsors disclose the following:
- Plan Identification – plan name and EIN number for any multiemployer plans in which an employer participates
- Level of Participation – amount of contributions made by the employer to the plan, and whether the employer’s contributions represent more than five percent of the total contributions made to the plan by all employers
- Financial Health – plan’s funded status, or zone status, or if none is available, the percentage funded level range as described previously
- Employer Commitments – disclosure of the expiration dates of the collective-bargaining agreements and a disclosure of any minimum contributions required to be made by the employer to the plan.
The above disclosures, which BLS includes in financial statements, are required for nonpublic entities for fiscal years ending after December 15, 2012, and disclosures should be made for all prior periods presented. Construction contractors that are signatories to a collective bargaining agreement that includes contributions to a multiemployer pension plan must work with their accountants and the plan’s actuary to obtain the necessary information to comply with the Financial Accounting Standards Board disclosure requirements.