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Withdrawal liability is a topic that signatory contractors need to understand. Here’s a quick primer on the issue:

What is Withdrawal Liability?

Withdrawal liability was created by the Multiemployer Pension Plans Amendments Act of 1980 (MPPAA), which amended the Employee Retirement Income Security Act (ERISA). It applies only to multiemployer pension plans and not group health or other “welfare” plans. Under the withdrawal liability rules, an employer that withdraws from a multiemployer pension plan must continue funding the plan’s liability for “unfunded vested benefits” or “UVBs.” Upon withdrawal, the plan determines the amount of an employer’s liability, notifies the employer of that amount and collects it from the employer.

When is Withdrawal Liability Triggered?

There are two types of withdrawals that can trigger withdrawal liability: (1) a complete withdrawal and (2) a partial withdrawal. A “complete withdrawal” is defined as (1) a permanent cessation of the employer’s obligation to contribute to the plan, or (2) a permanent cessation of the employer’s covered operations under the plan. Examples of a complete withdrawal include:

  • A contractor “closes up shop,” sells its assets and terminates all employees.
  • A contractor terminates its CBA and “goes non-union.”
  • A contractor’s employees decertify the union, and the contractor ceases to have a contribution obligation under the CBA.

With respect to a “partial withdrawal,” there are two types: (1) a 70% decline or (2) a “partial cessation” of the employer’s contribution obligation. A 70% contribution decline, which constitutes a partial withdrawal, occurs if, during each plan year in the “three-year testing period” (i.e., the plan year in which the withdrawal allegedly occurred and the immediately preceding two plan years), the employer’s “contribution base units” do not exceed 30% of its contribution base units for the “high base year.” A partial withdrawal also occurs when an employer no longer has contractual obligations under one or more (but not all) of its CBAs and continues to perform the same type of work within the jurisdiction of the CBA.

Aren’t There Special Withdrawal Liability Rules for Construction Contractors?

The MPPAA included a special withdrawal liability rule for “work performed in the building and construction industry.” Only if “substantially all” (which courts have interpreted to mean 85% or more) of the employees for whom the employer contributes are in the industry is the employer deemed to be “in the building construction industry.”

A withdrawal occurs only if the employer ceases its obligation to contribute to the plan but continues to work within the jurisdiction of the CBA or returns to do the same type of work within the jurisdiction within five years, without resuming contribution obligations. Congress included the special rule for work “in the building and construction industry” on the theory that:

[A]n employer’s leaving the jurisdiction of the plan or going out of business does not typically reduce the plan’s contribution base. Rather, an employer reduces the plan’s contribution base only if it continues to do what would have been covered work but does not have an obligation to contribute to the plan for that work. In order to protect that plan, the continuation of work without contributions is treated as a withdrawal in these industries. Other characteristics of the industr[y], including the mobility of both employers and employees and the intermittent nature of employment also persuade the [Senate] Committees that this special rule is needed.

There is also a special partial withdrawal rule for the building and construction industry. An employer subject to the complete withdrawal rules for the building and construction industry is “liable” for a partial withdrawal only if the employer’s continued obligation to contribute to the plan is for no more than an “insubstantial portion of its work in the craft and area jurisdictions to the collective bargaining agreements for which contributions are required.”

Importantly, in order to be covered by the exemption, the contractor’s activities must fall within the definition of the “building and construction industry.” For example, a company’s shop fabrication and off-site manufacturing activities generally do not meet the criteria for being part of the building and construction industry. Likewise, one court concluded that the exemption was not applicable to an employer that delivered road oils and asphalt materials to contractors and governmental agencies involved in road construction and repair.

Conclusion

Signatory contractors need to understand withdrawal liability and the special rules for employers in the “building and construction industry.” If a contractor believes it is subject to the exception for employers in the “building and construction industry,” then it should engage competent counsel to ensure they are in fact covered and take any necessary steps to ensure they’re covered in the future. Remember, the special rules for employers in the “building and construction industry,” may not automatically eliminate your withdrawal liability exposure.