Arbitrator Slashes Annual Withdrawal Liability Payments in Underfunded Multiemployer Pension Plan Dispute

Employers who cease contributing to an ERISA multiemployer pension plan are liable for their allocable share of any underfunding, or “withdrawal liability.”

For a variety of reasons, withdrawal liability has become both prevalent and significant. Indeed, the Pension Benefit Guaranty Corporation (the federal agency tasked with the enforcement and regulation of the withdrawal liability rules) has estimated that approximately 10 percent of the 1,400 multiemployer pension plans face insolvency in the next 10 years to 15 years. Legislation to address this looming multiemployer pension plan crisis includes the Pension Protection Act of 2006 (“PPA”).

Under the PPA, a multiemployer pension plan actuary must certify a plan’s funding status (ranging from red to green zones) annually. “Red zone” or critical status plans must adopt a PPA “Rehabilitation Plan” (essentially, a series of contribution schedules and other steps intended to allow the plan to emerge from critical status). This PPA Rehab Plan will result in contribution surcharges of 5 percent to 10 percent during the term of the collective bargaining agreement in effect when the plan enters critical status (referred to as “PPA Surcharges”). A default contribution schedule will be imposed unilaterally by the plan if a Rehab Plan-compliant contribution schedule is not adopted within 180 days after the current collective bargaining agreement expires (referred to as “Rehab Plan Increases”).

A multiemployer pension plan cannot demand that withdrawal liability be paid in a single lump sum. An employer generally must make annual payments determined by statutory formula and referred to as the “annual payment amount.” This annual payment amount is determined by multiplying the average “contribution base units” (the basis by which contributions are determined, such as hours worked) with the “highest contribution rate” (defined as the highest rate at which the employer had an “obligation to contribute” to the plan).

Absent a “mass withdrawal” or other catastrophic plan event, an employer generally is limited to 20 payments of the annual payment amount; any reduction in the annual payment amount thus can drastically reduce an employer’s withdrawal liability.

Jackson Lewis assisted an employer in prevailing in an arbitration that involved a withdrawal liability payment and PPA...