By Jane Meacham, Contributing Editor

Plan withdrawal liability has been in place for U.S. multiemployer plans since 1980. It includes a heavy penalty that requires employers leaving a multiemployer plan to pay their share of the plan’s vested benefits not yet covered by contributions and investment earnings. As a result, healthy companies often seek to leave multiemployer plans before their liability for other, financially weaker participating companies soars.

Does the Employee Retirement Security Act of 1974 (ERISA) allow employers to abandon these sinking ships scot-free? No, according to a recent decision by the U.S. 11th Circuit Court of Appeals— which covers Alabama, Florida, and Georgia.

Background of the Case

WestRock RKT Co. v. Pace Indus. Union-Mgmt. Pension Fund, No. 16-16443 (11th Cir., May 16, 2017), involved the underfunded Pace Industry union pension, which amended its 2010 rehabilitation plan to require any employer leaving the plan to pay some of the collective funding deficiency. Participating employer WestRock sought court approval to strike the amendment as being contradictory to ERISA.

WestRock also claimed that the Pension Protection Act of 2006 (PPA) allowed employers to bring procedural and substantive challenges to rehabilitation plans; the PPA requires multiemployer pension funds in “critical status” such as Pace’s—in general, those less than 65-percent funded—to develop rehabilitation plans aimed at raising and stabilizing funding levels.

Employer Arguments Denied

The 11th Circuit, affirming a lower-court decision, denied WestRock on both counts, concluding that ERISA doesn’t allow an employer to oppose changes to the rehabilitation plan for a multiemployer plan in critical status.

The court ruled that the disputed rehabilitation plan required the employers involved in the plan to make contributions toward the plan’s funding deficiency if they chose to leave the plan. This payment was separate from—and on top of—any withdrawal liability payments that were statutorily required, the court said.

The withdrawal liability for companies attempting to leave a multiemployer plan that’s been in place since 1980 can easily amount to several times an employer’s net worth. Withdrawal can occur either when an employer files for bankruptcy, permanently ceases operations, or has stopped having an obligation to contribute.

The court also noted that WestRock never alleged that the challenged Pace plan’s rehabilitation plan was legally nonconforming: “… WestRock has not cited to any portion of ERISA that explicitly states that a plan sponsor cannot put in place a system for charging withdrawing employers for their share of the accumulated funding deficiency,” the ruling stated.

“Given the WestRock decision and the overall favoritism that courts show multiemployer plans, contributing employers have few options other than minimizing their participation to the extent possible, and, if economically feasible, withdrawing from multiemployer plans,” advised Fisher Phillips law firm Partner Robert C. Christenson in a September 5 client bulletin on the decision. “Contributing employers should carefully monitor the amount of withdrawal liability they face from multiemployer plans, and be aware of any plan rules that could increase that liability.”

PBGC Rescue Endangered

For several years, the U.S. Pension Benefit Guaranty Corp. (PBGC) has said its projections show its multiemployer guarantee program is likely to run out of money in the next decade, even after changes from federal legislation in recent years that boosted the plan premiums that partially fund it.

The agency has estimated that 10 million people are part of these plans, also known as “Taft-Hartley plans,” which usually cover unionized workers at unrelated, often small companies in sectors such as construction, retail, trucking, mining, and entertainment.