Do You Know the Financial Status of Your Union Pension Fund?
For Your Benefit
Many employers with union employees contribute to multiemployer (or union sponsored) pension plans on behalf of those employees. Although most of these plans are traditional defined benefit plans – providing employees with a fixed monthly pension at retirement – the contribution paid by the employer is determined by collective bargaining. Many employers still operate under the misconception that their monthly contribution to the union pension fund represents the full extent of their liability to those employees for retirement benefits. However, nothing could be further from the truth, as financial pressures on multiemployer pension funds during the last 30 years have resulted in changes in the law that may cost employers millions.
Undoubtedly, most employers that contribute to union pension funds are aware they may become liable for a withdrawal liability payment in the event they stop contributing to the multiemployer pension fund. This may arise in the event of a sale of the assets of the employer, a bankruptcy of the employer or a decertification of the union. In 1980, Congress enacted the Multiemployer Pension Plan Amendment Act (MPPAA), requiring employers to pay their proportionate share of the multiemployer fund’s “unfunded liabilities” upon withdrawal from the fund. Gradually, employers have become aware of their obligations under MPPAA, but most have assumed they would have no liability beyond their collective bargaining contribution obligation. This assumption was rendered false by the provisions of the Pension Protection Act of 2006 (PPA).
The multiemployer provisions of PPA generally are effective beginning in 2008 in order to address alarming funding problems encountered by many multiemployer plans. PPA gives trustees of multiemployer funds powerful tools to keep plans financially solvent. For this purpose, PPA established three categories (or “zones”) of plans: (1) “Green Zone” for healthy; (2) “Yellow Zone” for endangered; and (3) “Red Zone” for critical. These categories are based upon the funding ratio of plan assets to plan liabilities. In general, Green Zone plans have a funding ratio greater than 80%, Yellow Zone plans have a funding ratio between 65 and 79%, and Red Zone plans are less than 65% funded.
Each plan’s actuary must certify the plan status within 90 days of the start of the plan year. Participants and contributing employers must to be notified of the status of the plan. Each Yellow Zone plan must adopt a funding improvement plan designed to increase its funding percentage by 33% within 10 years. Such a plan likely will include a combination of increased contributions and reduced benefits in order to stabilize the plan’s financial condition. For plans in the Yellow Zone, there is no “stick” to force the employer to adopt any increased contribution levels mandated by a funding improvement plan until the expiration date of the current collective bargaining agreement, at which time the plan becomes a subject of collective bargaining. If an agreement cannot be reached, the trustees of the plan have the authority to impose a default contribution schedule upon the employer.
Trustees of a plan in the Red Zone must adopt a rehabilitation plan designed to allow the plan to emerge from critical status within 10 years. Similar to Yellow Zone plans, trustees of Red Zone plans may force employers that fail to reach agreement at the next collective bargaining negotiations to adopt a default plan of mandated contributions. Trustees of Red Zone plans also may impose additional contribution obligations upon employers that do not immediately agree to the higher contributions proposed in the rehabilitation plan. Until the expiration of the current collective bargaining agreement, employers have a choice between accepting the higher rate of contribution or paying a 5% surcharge during the first year and 10% each year thereafter until the expiration of their collective bargaining agreements. Trustees of Red Zone plans have the power to eliminate certain “adjustable benefits,” which include post-retirement death benefits, 60-month guarantees and other subsidized optional payment forms, disability benefits not yet in pay status, and early retirement benefits.
Employers in Red Zone plans faced with the choice of accepting a rehabilitation plan or paying a surcharge need to consider a variety of factors, which are too numerous to mention here and outside the scope of this article. Clearly, employers need to be cognizant of onerous “default” contribution schedules that may be imposed, if the rehabilitation plan is not adopted. Other particularly troubling concerns from an employer perspective are rehabilitation plans that grant discretion to fund trustees and managers to “adjust” contribution rates in the event the trustees determine that the rehabilitation plan has not achieved its goals. Employers should be especially wary about agreeing to an “open-ended” rehabilitation plan. The possibility of withdrawal from the plan as an alternative to drastically higher or open-ended contribution obligations is an option that almost always should be considered.
In conclusion, it is incumbent upon employers that participate in multiemployer plans (and wish to avoid unpleasant surprises) to take a proactive approach concerning their financial obligation to those plans. At minimum, the employer should consider the following:
- Investigate the financial condition of the multiemployer plan through review of information provided by the plan and other publicly available information.
- Request and review information made available, including withdrawal liability estimates, actuarial reports and financial reports of the plan.
- Monitor the funding status of the plan and review financial and bargaining options, even if it is not in Red or Yellow Zone status, and consider withdrawal from the plan before financial problems arise.
- Employers with plans in Yellow or Red Zones need to monitor fund status even more closely and consider the following alternatives:
- In Red Zone status, compare cost of additional contributions, including the cost of additional possible increases, to the cost of surcharge.
- Compare the cost of remaining in the plan versus the costs of withdrawal liability and funding alternative benefits.
- Participation in a multiemployer plan involves a variety of issues in addition to the obvious financial concerns, including the degree to which the union is wedded to the multiemployer plan and its receptiveness to alternative structures.
- Employers faced with union reluctance to alternatives should consider a right to withdraw or offset of other benefits in the event penalties or contribution increases are imposed.
- Evaluation of these considerations is as much of an art as it is a science. However, it is well worth the investment in time and effort.
Clearly, PPA imposes new, and very serious, obligations upon employers who contribute to multiemployer plans, and it is critical that those employers seek the advice of experienced and knowledgeable professionals in navigating those issues and obligations.
For more information regarding this topic, please contact Harvey M. Katz at 212.878.7976 or firstname.lastname@example.org.