• Multiemployer Plans: Understand the Liability Before You do the Deal
  • May 15, 2015
  • Law Firm: Smith Haughey Rice & Roegge, P.C. - Traverse City Office
  • With unfunded liabilities continuing to grow, multiemployer pension plan liability continues to be a real concern in corporate transactions. Depending on the transaction, a withdrawal from the multiemployer pension plan may be triggered, creating a liability for the seller or, in some cases, the buyer as a successor to the seller’s business. Buyers need to take precautions to either limit their liability or understand the extent of these liabilities before agreeing on a deal structure.

    If a buyer decides to buy the stock of a seller that is a contributing employer to a multiemployer pension plan, and the obligation to contribute to the multiemployer pension plan and the level of contributions continue without any interruption after the sale, no withdrawal from the multiemployer plan will be triggered. If, instead, the buyer only wants to purchase the assets of a seller that is a contributing employer, this often triggers a withdrawal when the seller either completely or partially ceases to contribute to the multiemployer pension plan. However, if the parties structure the asset sale in accordance with the requirements under ERISA Section 4204, a withdrawal will not be deemed to have occurred on the date of the transaction.

    The requirements under ERISA Section 4204 are detailed and include requirements that:
    • the buyer assume the obligation to contribute to the multiemployer plan at substantially the same level as the seller was contributing prior to the sale;
    • the buyer post a bond or escrow for five plan years equal to the greater of the average annual contribution of the seller for the past three years or the prior year’s contribution amount;
    • the asset purchase agreement state that, if the buyer withdraws within five plan years, the seller is secondarily liable for the amount of the withdrawal liability it would have incurred on the date of the asset sale but for this exemption.
    If the seller distributes all or substantially all of its assets or liquidates prior to the end of the five plan years, the seller is required to post a bond or escrow equal to the present value of the withdrawal liability the seller would have had on the date of the asset purchase. There are additional requirements and exceptions under Section 4204 that the parties will need to review in structuring a transaction to comply with Section 4204. Buyers that are considering the purchase of assets of a seller where a partial or complete cessation of contributions to a multiemployer plan will occur should consider whether this exemption under ERISA Section 4204 makes sense for their transaction.

    In some cases, the seller’s liquidation or dissolution value may dictate the amount of withdrawal liability in an asset sale. Under ERISA Section 4225, withdrawal liability triggered in an asset sale is limited to the greater of (1) a portion of the liquidation or dissolution value of the selling contributing employer (determined after the sale or exchange of such assets) or (2) if the multiemployer pension plan uses the “attributable method” of allocating withdrawal liability, the unfunded vested benefits attributable to the seller. The limits on the amount of withdrawal liability based on the liquidation or dissolution value of the company are set forth in the statute and increase from 30% of the liquidation or distribution value of the seller after the sale (if the value does not exceed $5 million) to 80% of the liquidation or distribution value if it exceeds $25 million. For purposes of determining whether the multiemployer plan uses the “attributable method” for allocating withdrawal liability, buyers should look at the multiemployer pension plan documents and withdrawal liability estimate. Similar to the discussion of ERISA Section 4204 above, there are other details under ERISA Section 4225 that will need to be reviewed in connection with an asset deal.

    Buyers need to be proactive and make sure that they gather as much information about any potential seller liability under a multiemployer pension plan. The buyer should be provided with an estimate of the withdrawal liability prepared by the multiemployer pension plan. Although this estimate will not provide the current liability, it at least gives the buyer an idea of the potential size of the liability if a withdrawal occurs. Additionally, due diligence of the seller’s contribution history (including any other members of the seller’s controlled group) is important to understanding what potential multiemployer plan liabilities might be lurking. In certain situations, courts have imposed the seller’s withdrawal liability and/or liability for missed contributions on a buyer of assets under a successor employer theory. Thus, it is incumbent upon the parties to make sure they understand the seller’s multiemployer plan obligations (both past and present) to get a sense of any withdrawal liability and develop a structure to mitigate or avoid such liability.