U.S. Supreme Court Grants Cert In Multiemployer Pension Plan Case

The U.S. Supreme Court is poised to hear a case during its next term that focuses on how multiemployer pension plans determine withdrawal liability when employers leave the plans. The Court's decision in M & K Employee Solutions LLC v. Trustees of IAM National Pension Fund could have significant effects for small, unionized employers. Although a relatively small percentage of employers contribute to multiemployer pension plans, the perils of withdrawal liability are a more widespread threat to small businesses.

The U.S. Court of Appeals for the D.C. Circuit's ruling in M & K Employee Solutions LLC allows multiemployer pension plans to use actuarial assumptions after the "measurement date" to calculate withdrawal liability. The measurement date is the date on which the pension plan measures its assets and liabilities, which is often the last day of the plan year. Although employers objected, the D.C. Circuit found that this calculation technique meets the requirement under the Employee Retirement Income Security Act (ERISA) that plans use their "best estimate" to protect plan participants. The decision also conflicts with the stricter approach previously adopted by the U.S. Court of Appeals for the Second Circuit.

According to the Pension Benefit Guaranty Corporation's (PBGC) 2024 fiscal year report, about 1,335 multiemployer pension or Taft-Hartley plans exist in the U.S., with about 11 million participants consisting of current and retired employees. In most cases, the contributing employers are part of the same industry and tend to be more prevalent in traditionally unionized industries. These plans are subject to collective bargaining and administered by a board of trustees that is equally made up of employer and union representatives. Employers and unions that opt to participate in these plans must engage in bargaining and then are bound by the plan terms.

However, participation in multiemployer pension plans has declined in recent years for various reasons. For instance, automation has reduced the number of employees in industries that typically participate in these plans. People are also living longer, which increases the projected cost of their pension. Although less common, these plans will continue to exist until benefits are paid out to the last participant or
beneficiary.

When a contributing employer evaluates whether to leave a multiemployer plan, it can obtain a withdrawal liability estimate. The Employee Retirement Income Security Act (ERISA) imposes a withdrawal liability on employers who either completely or partially withdraw from such plans.

Withdrawal liability can be millions of dollars, even for a small business, which leads to it being one of the most litigated ERISA subjects. In this case, the disputed issue is when to determine the factors used to calculate withdrawal liability. For example, a decrease in the interest rate assumption in the calculation of withdrawal liability can substantially raise the amount of an employer's withdrawal liability. A decrease in the interest rate also decreases the projected value of the plan assets. When this occurs, more funding is needed to ensure a complete payout of benefits in the future. Furthermore, it increases the incidence and amount of underfunding for a plan, which, in turn, increases the amount of the employer's withdrawal liability. It may also increase the amount that remaining employers must contribute to participate in the plan.

The timing of the withdrawal liability determination factors can also affect mergers and acquisitions. For instance, a buyer of a company typically would pay a reduced purchase price to account for the withdrawal liability. Potential inaccuracies in the withdrawal liability estimate can lead to difficulties finding a buyer and receiving a fair price for the sale of a company.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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