Employers participating in multiemployer plans should be well aware of the funded status of those plans. Annually the employer must receive notice from the plan about its funded status including whether it is in “endangered” or “critical” status. Under the Pension Protection Act of 2006, a multiemployer pension plan is endangered if among other criteria, it is less than 80% funded and is in critical status if among other criteria, it is less than 65% funded. If a plan falls into critical status, participating employers must contribute an additional surcharge and the plan must adopt a rehabilitation plan aimed at improving the plan’s funded status.
The Second Circuit Court of Appeals recently decided a case involving an employer who withdrew from a multiemployer plan in critical status, an action that resulted in the employers owing withdrawal liability. What the employer did not expect, however, was that the multiemployer plan took the position that the employer was not permitted to withdraw from the plan once the plan was in critical status. According to the plan, the employer would have to remain in the plan until the plan was better funded.
The district court concluded that the Pension Protection Act did not prohibit an employer from withdrawing from a multiemployer plan in critical status and the court of appeals affirmed that decision.
We have been assisting a number of employers faced with increased contributions to multiemployer plans and reduced benefits for covered plan participants as the multiemployer plans try to become better funded. With this decision, we know that one tool still in the employer’s toolbox is negotiating with the union for withdrawal from the plan in situations where paying the withdrawal liability makes more sense to the employer than continuing to participate in the plan.