This post, written in partnership with Mary Komornicka, is the second post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another business. The last post discussed a buyer’s acquisition of a union business.

Withdrawal Liability

Whether an acquisition transaction involves the purchase of assets or stock, the buyer should be aware of multi-employer pension withdrawal liability. The concept of withdrawal liability is that where a pension plan is not fully funded, each employer is responsible for a share of the unfunded liability, which must be paid in the event the employer withdraws from the plan. An employer who terminates participation in a multi-employer pension plan, or substantially reduces its contributions to the plan, has either completely or partially withdrawn from the plan.

In 2006, Congress passed the Pension Protection Act of 2006 (“PPA”), which among other things, created three status groups for multiemployer pension funds: funds which meet the funding standards, endangered or seriously endangered funds, and critical funds. A fund’s actuary must certify the plan’s status within 90 days of the start of each plan year. A buyer considering the acquisition of a union business should ask the seller to request from the multiemployer pension plan for the information necessary to compute withdrawal liability and an estimate of potential withdrawal liability. Whether a multiemployer pension plan has sufficient funds to pay the benefits to all participants as promised in the pension plan will impact the extent of withdrawal liability.

Typical events that can result in withdrawal liability are the sale of a business, downsizing a business, or going non-union. There are different rules for certain industries, such as the building and construction industry, the entertainment industry, trucking, and the retail food industry.  These rules can alter the circumstances in which a business is deemed to have withdrawal liability.

In a stock purchase, the buyer steps into the shoes of the seller and assumes the collective bargaining agreement of the seller. The buyer would want to know whether a union collective bargaining agreement requires contributions to a multi-employer pension plan and, if so, whether that multi-employer pension plan is underfunded. The buyer would want to be aware of the potential for being responsible for withdrawal liability in the event it decides in the future to no longer operate as a union business (if the employer is in the building and construction industry) or if the employees vote to decertify the union.

If the acquisition is an asset purchase, things get more complicated. Whether the buyer is liable for the seller’s withdrawal liability depends on a number of factors.

Sale of Assets and Multiemployer Pension Plan Withdrawal Liability

In general, a complete or partial withdrawal will not occur when an employer sells the assets of its business if certain conditions are met:

  • The sale must be a “bona fide, arm’s length sale of assets to an unrelated party.”
  • The buyer must have an obligation to contribute to the plan for substantially the same number of contribution base units as did the seller
  • The buyer must post a bond for a five-year period. The amount of the bond is based on the seller’s average annual contributions over a specified period.
  • The purchase agreement must contain a provision which makes the seller secondarily liable if the buyer withdraws during the five plan years following the sale and does not pay its withdrawal liability.

If a business is a member of a control group, it is possible that entities under common control may be jointly liable for the company’s withdrawal liability if the company fails to pay its withdrawal liability. The MPPAA contains complex definitions of the control group. If a buyer or seller is a member of a control group, and the buyer does not intend to continue to make contributions to the seller’s multiemployer pension plan, they should consult legal counsel to determine whether other members of the control group may also be liable for the contractor’s withdrawal liability.

The size of the withdrawal liability in a multi-employer plan can be a surprise to the buyer and needs to be carefully considered in the negotiation of any deal.  Even a well-funded plan may have a withdrawal liability due to the long-term funding structure of these plans, thus no assumptions should be made.

Stay tuned for the next post which discusses a union company buying a non-union business.