Workforce Reductions During the Pandemic and Multiemployer Pension Plan Withdrawal Liability

March 29, 2020Alerts

When assessing whether workforce reductions are needed due to the COVID-19 pandemic – and, if so, to what extent and for how long – employers that contribute to multiemployer defined benefit pension funds on behalf of a unionized workforce should also consider the impact such decisions may have on potential withdrawal liability.

Both during the immediate response to the COVID-19 outbreak, and in the weeks and months after workers return to the workplace, strategic and informed decision-making is necessary to avoid inadvertently triggering a withdrawal.

Withdrawal Liability Types and Triggering Events

The general rule is that an employer that fully terminates participation in a plan, or substantially reduces its contributions to the plan, has withdrawn from the plan. There are two types of withdrawals:

Complete Withdrawal
A complete withdrawal occurs when an employer permanently ceases to have an obligation to contribute to a plan, or permanently ceases all covered operations under the plan. This can occur where an employer goes out of business, shuts down a plant or facility, ceases operations in a particular area or marketplace, negotiates out of its collective bargaining agreement the obligation to contribute to the plan or terminates its collective bargaining agreement all together. In these cases the employer no longer has an obligation to contribute to the plan and a complete withdrawal is triggered. These rules differ in certain industries.

In the case of an employer that contributes to a plan for work performed in the building and construction industry, a complete withdrawal only occurs if the employer ceases to have an obligation to contribute under the plan and either continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required or resumes such work within five years after the date on which the obligation to contribute ceases.

Partial Withdrawal
A partial withdrawal occurs when an employer has a decline of 70 percent or more of its contribution base units (CBUs) over a three-year period, or has a partial cessation of its obligation to contribute.

The law allows plans in the retail food industry to change that to a 35 percent decline. Certain funds sponsored by the United Food and Commercial Workers Union (UFCW), and its local unions, including the UFCW National Pension Fund, have adopted this special rule.

In the case of the 70 percent decline, a partial withdrawal occurs if in each of the three consecutive prior years an employer’s CBUs are less than 30 percent of its average CBUs in the two highest of the preceding five years.

Partial Cessation of the Obligation to Contribute

The other type of partial withdrawal – a partial cessation of the obligation to contribute – can occur in two ways:

  • The employer permanently ceases to have an obligation to contribute under one or more but fewer than all collective bargaining agreements under which the employer has been obligated to contribute to the plan, but continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required, or transfers such work to another location; or
  • An employer permanently ceases to have an obligation to contribute under the plan with respect to work performed at one or more but fewer than all of its facilities but continues to perform work at the facility of the type for which the obligation to contribute ceased.

Pandemic-Related Workforce Reduction Scenarios

Perhaps the most common strategy is an implementation of a reduction of a unionized workforce, either through temporary layoffs, furloughs or terminations. Because members of the bargaining unit are either no longer employed or not performing covered work during this period, the employer will not have an obligation to contribute to a fund.

But the cessation of contributions is temporally limited. When the unionized workforce is recalled or rehired, the employer’s obligation to make contributions on behalf of those employees will resume. In that scenario no complete withdrawal will occur because the cessation of contributions was not permanent.

If instead an employer does not rehire its unionized workforce and resume making contributions to the pension fund, a complete withdrawal may have occurred, though not necessarily.

In the case of an employer that has multiple facilities for which it has an obligation to contribute to the same pension fund, a permanent cessation of contributions at one of them will not be a complete withdrawal, though it may be a partial withdrawal, depending upon the magnitude of the decline in contributions. However, if there is a permanent cessation of contributions at one facility, and that is the only facility for which contributions are required to a pension fund, then a complete withdrawal will have occurred.

But for an employer in the building and construction industry that does not resume making contributions to a fund following a workforce reduction, a complete withdrawal will not have occurred unless the employer continues to perform covered work, without an obligation to contribute to the plan. That is, a building and construction employer that fully ceases operations will not have triggered a withdrawal from a plan.

More likely to occur through pandemic-related workforce reductions than a complete withdrawal is a partial withdrawal, of the 70 percent decline type. If in the aftermath of a workforce reduction an employer only partly rehires its unionized workforce, and in the years following never returns to its pre-reduction employment levels, a partial withdrawal may have occurred. Again for a 70 percent decline partial withdrawal to occur, it must be that in each of the three consecutive prior years an employer’s CBUs are less than 30 percent of its average CBUs in the two highest of the preceding five years. An employer can be proactive and carefully monitor its employment levels to ensure it avoids a 70 percent decline.

Similarly, if an employer has multiple facilities for which it has an obligation to contribute to the same pension fund, and rehires its unionized workforce and resumes contributions at some, but less than all of its facilities, whether a partial withdrawal has occurred will depend on the CBU levels. Along the same lines, if an employer does not rehire its unionized workforce at a facility for which it has an obligation to contribute to a pension fund, and instead transfers that work to another facility where it does not have an obligation to contribute to that same pension fund, a partial withdrawal will have occurred.

The Future of Plan Funding Levels

While funds with more diversified investment strategies will fare better than those with significant exposure to equity markets, it is likely that negative investment return, combined with a reduction in contribution hours, will put significant downward pressure on plan funding levels. Plans that were operating under funding improvement or rehabilitation plans may no longer be projected to meet their required progress and updates, in the form of increased contribution rates or benefit adjustments or both, may be needed. The pandemic-related workforce reductions and investment losses will further stress the multiemployer defined benefit pension fund system that was already in crisis.