UNFUNDED LIABILITY IN THE CONSTRUCTION INDUSTRY
When Congress passed the Multi-Employer Pension Plan Amendments Act (MEPPAA) the intent was to put rules and structure around how employee retirement related plans were administered when the plan involved multiple employers. When a single employer plan is involved the rules are far clearer. One of the key issues that were dealt with was Unfunded Liability (UL).
The UL concept is very detailed, but in general it refers to testing through actuarial assumptions to determine at a point in time the level of liability that might exist if the plan shuts down and does not have future contributions. The purpose of such a test is to determine if a contributing company owes any funds to the Plan when that company withdraws and ceases to contribute future funding. The logic is that it would be unfair for a company to be able to cease contributions and leave that liability for the remaining contributing employers.
Typically when a permanent cessation of an obligation to contribute occurs, the liability vests. This is the rule that forces a company that goes out of business or becomes nonunion to pay up. There is a construction industry exception. This exception is based on the logic that construction companies come into an area and through union agreements pay into retirement funds. It would be both unfair and impractical every time a construction industry left an area because of lack of work in that area to force UL payments.
The initial issue faced by a company is whether they are in the Building and Construction Industry in order to claim that exemption. The tests are very complex, but generally if the work performed by the company is done on construction sites, the exemption applies. If the work is off site assembly or delivery to the site far more research needs to be undertaken.
Once this exemption is determined to be available, the employer needs to examine the type of retirement plan that is included in the fund’s Plan. Unfunded liability only arises from Defined Benefit Plans. These plans establish a fixed amount that is due to retirees, or more typically establish a formula to determine that amount.
Well run Plans will each year have an independent actuary review their financials. These actuaries use several assumptions to determine the funding status at that point in time. They look at trends in employee coverage, earnings trends in the Plan and the extremely complex rules of the Pension Benefit Guaranty Corporation (PBGC). The PBGC was created to guaranty employee benefits where plans fail so their rules on maintaining the integrity of the Plan are conservative. The assumptions on the rate of earnings are very low, and thus often result in well run plans having UL as these well run plans have more earnings or contributions than the PBGC assumptions.
Each contributing employer has a right to ask the Plan administrator or trustees to provide a copy of that analysis each year, but it is not automatically issued. This report also has a section that allows an employer to calculate their own UL. Often for a fee the administrator will do those calculations. The calculations are complex; they look at the level of contribution, the number of covered employees and the duration of contributions.
Typically this liability is not carried on the books of a company as it has not vested. Vesting can occur in two ways. The first is if the fund collapses as most participants cease to contribute. The second and more typical is where;(A)an employer ceases to make contributions to the plan for work covered by the union agreements which created the trust in the geographic area covered by those union agreements and (B) that employer within five years commences to perform this same type of work in this same geographic area without making contributions.
This second situation was designed to catch the company that goes non-union. For example this vesting occurs if a company in some fashion eliminate its union agreement and with it the obligation to make contributions, but within five years that employer commence to do work covered by the union agreement in the same jurisdiction of the Plan and fails to make contributions to the plan for such work. In this instance the Plans trustees are obligated to make a claim for UL.
The key issue is whether the covered work has been performed by the withdrawing employer. A PBGC Opinion Letter has made it clear that subcontracting the covered work in the covered area does not resulting in vesting as it does not constitute self performing. Assigning the covered work to another union whose workers are employed by the target company is self performing.
Beware there is some vague language in ERISA that says a Plan can disregard a transaction if the principal purpose was to evade liability. It is not clear how this language could be used to try to impose vesting within that five year period, but is offered only as an alert that in depth research with a true ERISA expert is wise.
The amount of unfunded liability is always the source of complicated computations and as such is a lawyer’s dream. There are always a lot of negotiations involved. Each trust also has a policy regarding payment programs and interest computation methods; the payout is not always instantly required.
The AGC of America website contains valuable information on this subject. To access, click here.